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Proprietary Data Insights Financial Pros’ Top Chinese Stock Searches in the Last Month
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Is Alibaba Cheap Enough for Financial Pros? |
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How many tech companies do you know trade at 7x-8x cash and have easily grown revenues double-digits for years? Not many. And few that project mid-single digit forward revenue growth. Yet, that may not be cheap enough for financial pros who made Alibaba (BABA) their top-searched Chinese stock in the past month. Shares of the Chinese mammoth plunged after the latest earnings announcement despite sizable revenue and earnings growth. So, why aren’t big money managers interested in this stock? Alibaba’s Business Often called the Amazon of China, Alibaba specializes in e-commerce for B2B, B2C, and C2C through various channels. Alibaba is one of the world’s largest retailers and e-commerce companies and was also rated as the fifth-largest artificial intelligence company in 2020. The company’s revenues breakdown as follows:
Alibaba’s a great business. But it’s not been a favorite of the Chinese government. President Xi helped scuttle Ant Group’s IPO in 2020, while Jack Ma disappeared for months to no one knows where. The company’s latest attempt to spinoff its separate business units seems like a great idea. But it’s already garnering attention from government regulators, and not the good kind of attention. Financials
Source: Stock Analysis There’s no denying Alibaba’s incredible growth. Only recently have revenues decelerated to single-digit YoY growth. However, margins haven’t kept pace, uneven yet declining noticeably over time. That’s led to profit margins as low as 7.3% and as high as 14.5% in the last few years. Free cash flow remains a bright spot at 19.7%. With hardly any debt, management has chosen to buy back shares, which would normally be a boon for shareholders. However, U.S. investors hold only indirect ownership. And many worry they won’t ever see tangible returns. Valuation
Source: Seeking Alpha Alibaba is cheap no matter how you value the company. But then again, so is every other Chinese company on this list. JD.Com (JD), for example, trades at just 5.7x cash and 14.0x earnings. Baidu (BIDU) trades at 9.3x cash and 14.6x earnings. It speaks to the uneasiness investors have owning Chinese companies and the subsequent premium they demand for the risk. Growth
Source: Seeking Alpha Despite Covid restrictions, revenues grew steadily for all these companies over the last few years. So, it’s interesting to see forward sales estimates drop into the mid to low single digits. This speaks to a larger economic stall forecasted for the Chinese economy. Profitability
Source: Seeking Alpha Despite great profitability, Alibaba’s returns on equity, assets and total capital are fairly lackluster. Normally, this is just a sign of a high-growth company in its early years. However, it can also be an indication of financial manipulation.
Our Opinion 10/10 Alibaba is exceptionally cheap…too cheap to ignore. Shares took a dive as revenue estimates declined. Yet, if you take a multi-year outlook, there’s no reason to believe the slowdown will be permanent. Sure, there is huge political risk owning a Chinese company. However, we believe it’s been priced well enough to compensate you for that risk. |
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